Risk of floating is too great

13 Aug Risk of floating is too great

Both mortgage bonds and stocks are higher so far this morning, as both markets appear to be looking for definitive direction. The stock market sell-off we saw happen last week left stock prices in what is referred to as an “over-sold” position. This means that the relative price of stocks was below what is perceived to be their true value. This typically leads to a rally. However, the market was a little slow to react, with investors showing indecision as to whether or not to jump back into the stock frenzy that has set new record highs the past couple months.

The Mortgage Bankers Association released mortgage loan application data for last week. Again, we saw purchase loan applications drop by another 1% from the week prior. On a year over year basis, we are now down only 10% from this time last year. The improvement in the year over year numbers has been anticipated. As we all know, the housing market began to cool last year at this time as potential homebuyers opted to rent following the dramatic 1% increase in mortgage interest rates that happened last summer. It certainly isn’t because the purchase market is stronger….

Mortgage bonds have broken above their 25 and 50 day moving averages this morning. Hopefully they will be able to maintain their position throughout the day and close above these levels. However, the risk of falling below these levels is high, and will be fueled by the stock market strength that we have seen so far today. Until we make a decisive move above these levels, we will maintain our locking bias. We are near the top of a trading range that has proven to be too difficult to break through. Therefore, we feel the risk of floating is too great.